Skip links

How the Pay-As-You-Go Business Model Works

You know how when you want a candy bar or a new toy, your mom or dad doesn’t just give it to you for free? They make you pay for it out of your allowance money first. Well, believe it or not, that’s how lots of businesses work too. It’s called a “pay as you go” plan.

What does that mean exactly? Let’s break it down.

What Does “Pay As You Go” Mean?

“Pay” means to give money to someone for goods or services. Like when you pay for that candy bar at the corner store.

“As you go” means paying a little bit at a time, whenever you use or need something. Not all at once in a big lump sum.

So “pay as you go” put together means paying money in smaller amounts over time. Only pay for what you use, as you happen to use it.

Real World Examples

This may sound confusing, but you see pay-as-you-go plans all over in the real world once you start looking.

Remember when you begged your parents to get you a cell phone last year for your birthday? Well, your family’s wireless plan from a company like Verizon or T-Mobile is probably a pay-as-you-go deal.

You don’t pay Verizon for a whole year of cell phone service upfront in one huge payment. That would be crazy expensive! Instead, your parents just pay a smaller bill each month only for the amount of calling, texting, and data you actually used that month.

Pay as you go cell phone plans are popular because you’re only paying for what you truly need and use. Not for stuff you don’t end up using.

Another example is paying for rides from Lyft or Uber. You don’t pay them any money until you request a ride. The driver takes you where you want to go, you hop out, and then you pay for that one ride.

If you don’t ever call a Lyft or Uber, you never owe them a penny. It’s pay as you go in motion.

Advantages for Businesses

So why do so many businesses use this pay as you go model anyway? What’s the appeal?

Well, there’s a few big upsides:

Lower Costs: Businesses don’t have to shell out as much money upfront. For example, instead of investing in and maintaining a huge staff of employees year-round, companies can save money by only paying freelancers when work needs to get done.

Flexibility: Scaling up or down is easier without long-term commitments. A business only pays for things as needed, giving them wiggle room.

Predictability: Costs are more consistent when directly tied to usage and demand. No guessing how much they’ll end up spending.

Less Waste: Paying for actual usage means less unnecessary excess that goes unused but still paid for. Like paying for 1,000 cloud storage servers when only 100 are ever used.

As you can see, going the pay as you go route offers a nice mix of money saving, flexibility, predictability, and less waste.

Now what kinds of companies out there are using pay as you go plans today?

Modern Pay As You Go Business Models

From on-demand services to cloud computing and beyond, lots of industries leverage pay as you go.

On-Demand Service Platforms

Remember those Lyft and Uber examples? Well they fall into a broader “on-demand service” category. These platforms let people quickly order up services only when they want them:

  • Ridesharing like Lyft
  • Food and grocery delivery like DoorDash and Instacart
  • Odd jobs like TaskRabbit and Takl
  • Pet sitting like Rover and Wag

The workers get paid per task or project. You only pay for what you use, not a regular monthly fee. That’s textbook pay as you go.

Customers love the convenience, while the startups behind them save money without hiring tons of full-time employees. It’s a match made in business model heaven.

Cloud Computing

Another big user is cloud computing companies like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud.

Put simply, the “cloud” refers to programs, data, storage, and such that live online instead of on a computer hard drive. It’s a fancy way of saying “stuff on the internet.”

Cloud companies rent these services to other businesses for their websites and apps:

  • Servers and bandwidth
  • Virtual machines
  • Storage space
  • Databases

Instead of buying tons of expensive tech hardware that just sits there unused, the cloud lets businesses pay for only the amount they need right now. Then they scale up and down as demands change.

For example, maybe a company only requires 100 GB of cloud data storage today. But next month they may need 500 GB for a new project. No problem! They avoid wasting money on unused storage space in the meantime.

It’s an incredibly flexible and money saving setup.

Software as a Service (SaaS)

Ever heard of apps like Slack, MailChimp, or Shopify? They exemplify another modern spin on pay as you go known as “Software as a Service” or “SaaS.”

SaaS companies sell access to their software by subscription (usually monthly or yearly payments) over the Internet. This saves users from spending big bucks to buy it outright forever.

Instead of one lump sum payment, you pay smaller recurring fees to use the software as long as you need it. You can cancel anytime.

Once again – convenient access for users and predictable revenue for the software companies. It’s a win-win.

There are now thousands of SaaS apps out there for everything from email marketing to accounting to graphic design.

Utility Computing

Lastly is a fancy new trend dubbed “utility computing” or “utility as a service.”

Remember how water, electricity, and gas utilities charge your family at home for only what gets used each month? Now business functions like computing, storage, and bandwidth work the same way!

Companies access these utilities over the internet as pay as you go services when needed. Then they get billed periodically based on metered usage, just like your household utilities.

It saves them big time by not having to maintain their own expensive hardware that mostly gathers dust. Plus they reduce wasted capacity when demands are lower.

Major players here include AWS, Google Cloud, Microsoft, IBM, and Oracle behind the scenes providing all the infrastructure and utilities.

Too Good to Be True? Potential Downsides

With all these benefits to customers and companies, pay as you go business models almost sound too good to be true!

But there are some potential downsides users should keep in mind too:

  • Variable pricing: Per unit costs may frequently change based on demand, time of year, availability, etc. Difficult to predict exact future charges.
  • Data loss risks: Storing data/files in another company’s cloud leaves you dependent on them safeguarding it properly.
  • Feature limitations: Flexible access tends to offer lighter feature sets than traditional licensed software.
  • Scaling delays: During busy times, may wait in queue for new cloud capacity to spin up quickly enough.

At the end of the day though, pay as you go still beats old-school lumpsum purchases in many situations. Just walk into it with eyes open about the tradeoffs involved.

Payment Options 101

Now you know all about pay as you go and why businesses love it. But how exactly do they pay for these goods and services as they use them?

There’s essentially two options…

1. Subscriptions

One route is signing up for a subscription service account. This automatically bills you weekly, monthly, or annually for ongoing access as laid out in a service agreement.

Netflix, cable TV, SaaS apps, and cell phone contracts work this way. Plans can vary from super flexible (cancel anytime) to 1 or 2 year commitments. Read terms closely!

Pros are predictable repeating revenue for the business while customers avoid usage hassles. Downsides may be paying for unused access sometimes.

2. Usage-Based Billing

Alternatively, companies utilize “usage-based billing.” Here you only pay for exact units consumed per use case – nothing pre-committed upfront. More of a pure pay as you go approach.

Cloud computing often uses usage-based billing because resources fluctuate a lot. Companies only pay for storage space, bandwidth, computing time, and such that they actually use each month. No guessing or pre-purchasing capacity.

Pros here are optimized costs and eliminating waste since you’re billed per actual usage amounts. Downsides may be unpredictable monthly charges depending on needs that month. Spikes could get expensive!

The Future Looks Bright!

While pay as you go businesses have been around for ages, never before has so much of the economy moved in this flexible direction.

New startups realized they could disrupt old industries by offering pay as you model alternatives. Suddenly customers had cheaper, more customized options at their fingertips without long contracts or big upfront costs.

Now as technology improves even faster, expect pay as you go services to keep spreading. For example, imagine self-driving robotaxis from Tesla or Apple that only bill per ride. Or virtual reality worlds like Metaverse where you pay real money for digital clothes, land, and upgrades.

Exciting innovations, but also complex questions around usage rights, privacy, security, and regulation. Still, the convenience and cost control of pay as you go can’t be ignored.

Ten years from now we may see 100 million digital subscriptions and metered cloud utility accounts powering our daily lives. And it all traces back to sticking to budgets – only paying for what you really use!

So next time your parents argue over another icy mocha latte or late night pizza delivery purchase, remind them “Hey, this is just our family activating our pay as you go lifestyle!”

Leave a comment